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Euro Remains Capped by 1.30 as OECD Calls for ECB Support

Euro Remains Capped by 1.30 as OECD Calls for ECB Support

David Song, Strategist
Forex_Euro_Remains_Capped_by_1.30_as_OECD_Calls_for_ECB_Support_body_ScreenShot288.png, Euro Remains Capped by 1.30 as OECD Calls for ECB Support

Talking Points

  • Euro: OECD Sees 0.6% Contraction- Calls for Further ECB Support
  • British Pound: Continues to Carve Higher Low Around 1.5000
  • U.S. Dollar: Tumbles Lower Ahead of Boston Fed President Rosengren

Euro: OECD Sees 0.6% Contraction- Calls for Further ECB Support

The Euro snapped back on Wednesday despite the dismal developments coming out of the monetary union, but the EURUSD may continue to range-bound prices ahead of the European Central Bank (ECB) interest rate decision on tap for next week as market participants weigh the outlook for monetary policy.

Indeed, unemployment in Germany increased 21K in May amid forecasts for a 5K print, while the ECB said private sector lending contracted for the 12th consecutive month in April as the region remains mired in recession. As the Organization for Economic Cooperation and Development(OECD) now sees the euro-area contracting 0.6% in 2013, the group encouraged the central banktosupplement its recent cut in the refinancing rate by reducing the deposit rate to below zero’ and said that ‘more can be done through further non-conventional measures’ as the governments operating under the monetary union struggle to get their house in order.

Although a growing number of Governing Council officials see scope to purchase Asset-Backed Securities (ABS), we may see a growing rift within the ECB as European policy makers become increasingly reliant on monetary support, and central bank President Mario Draghi may face greater difficulty in steering the region out of recession as the EU scales back its push for austerity.

As the EURUSD continues to carve a lower top below the 1.3000 figure, the weakening outlook for the region should keep the head-and-shoulders formation intact and the bearish sentiment surrounding the single currency may gather pace in June should the ECB show a greater willingness to further embark on its easing cycle in the second-half of the year.

In turn, we are still waiting to see a move back towards the 23.65 Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, and the bearish formation may continue to take shape in the month ahead as the fundamental outlook for the region turns increasingly bleak.

British Pound: Continues to Carve Higher Low Around 1.5000

The British Pound bounces back from a fresh monthly low of 1.5007 and the sterling may continue to press higher ahead of the Bank of England (BoE) policy meeting as the central bank is widely expected to keep the benchmark interest rate at 0.50% while preserving the Asset Purchase Facility capped at GBP 375B.

Although BoE board member Charles Bean warned that the high levels of debt ‘will act as a drag on demand growth,’ we should see the majority of the Monetary Policy Committee remain on the sidelines as the Funding for Lending Scheme continues to work its way through the real economy, and the central bank may look to switch gears later this year as the U.K. skirts a triple-dip recession.

As the economic docket is expected to instill an improved outlook for Britain, we may see the GBPUSD continue to build a short-term base above the 1.5000 handle, and we may see the sterling recoup the losses from earlier this year should the BoE talk down speculation for more quantitative easing.

U.S. Dollar: Tumbles Lower Ahead of Boston Fed President Rosengren

The greenback gave back the advance from earlier this week, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)tumbling to a low of 10,773, and the reserve currency may struggle to hold its ground during the North American trade should Boston Fed President Eric Rosengren, who also serves on the FOMC this year, strike a dovish tone for monetary policy.

Indeed, Mr. Rosengren may add to the discussion in tapering the Fed’s asset purchase program as the central bank aims to encourage a stronger recovery, but we may see a growing number of central bank officials start to become more upbeat on the economy as the region gets on a more sustainable path.

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--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong

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